The use of stop loss and take profit in Forex

There are many essential elements you need to learn in trading. Without having a precise knowledge about the professional trading environment, you can’t expect to make money. The new traders are losing money because they always take a huge risk in each trade. They forget the importance of money management. Some of you might think you can use the mental stops to reduce the risk exposure but this is not how things work. The new traders might not understand the importance of stop loss and take profit. But after reading this article, you will never execute any trade without setting a perfect stop or take profit level.

What is stop loss and take profit?

When a trader sets a predefined price for a trade to save their investment, it’s known as stop loss. Let’s say, you have executed long orders in the EURUSD pair with a 10 pips stop. So, if the price of the asset drops 10 pips, the trade is closed automatically. Even with a 100 pips drop, you will get away with 10 pips loss. When it comes to making a profit, you can easily book a certain portion of the profit by using the take profit order.

Use of support and resistance level

Those who are new to the trading industry often use rigid numbers to set the stop loss and take profit level. But if you do so,  the chances are very high that you will never make any profit from this market. You have to understand the support and resistance level trading strategy. If you execute long to order, set the stop loss just below the critical support level. Similarly when you set a short order, set the stop loss just above the critical resistance level. Think like the professional traders in the exchange traded funds industry. Never try to trade this market with emotions as it will always result in heavy loss.

Managing the risk factors

Being a new trader, it will be really hard to manage the risk factors. Most of the new traders try to use mental stops to manage their fund. But mental stops are only for the experienced traders. Unless you push yourself to the edge, you are bound to lose money. Learn the details of money management policy since it will help you to make a better decision. Regardless of the quality of the trade setup, you should never risk more than 2% of your account balance. Follow a conservative trading technique and it won’t take much time to develop your skills.

Dealing with emotions

You might learn the perfect way to use the stop loss and take profit level. But this doesn’t mean you will be able to make a profit in the long run. Consider trading as your business and create a stable trading system. Instead of trading the market in the real account, focus on your demo trading performance. If you manage to make a consistent profit, switch to the real account and try to create a balanced trading strategy. Control your emotions so that you can easily make a profit in the long run. Forget about the losing orders and stick to your trading goals.

Dealing with the lower time frame

Though higher time frame trading is extremely profitable, the pro traders often trade the lower time frame data. Lower time frame trading is extremely risky but if you learn the use of tight stop loss you can easily make a huge profit from this market. As an aggressive trader, you must keep yourself updated with the latest market news. Stay in the sideline before the high impact news since it will help you to make a better decision. Learn to trade the market with proper logic and focus on multiple time frame analysis. Take your steps very carefully so that you don’t have to lose a big sum of money for small mistakes.